Week 3 Flashcards
Explain what Accounting Policies are
Accounting policies are the specific principles, rules and procedures applied by an entity to ensure that
transactions are recorded properly, and financial statements are prepared and presented correctly.
Give examples of what accounting policies are used for:
They are used to deal specifically with complicated or subjective accounting practices such as:
depreciation methods
recognition and treatment of goodwill, accounting for research and development costs,
inventory valuation
preparation of consolidated financial statements
What does IAS 8 cover?
Accounting Policies, Changes in Accounting Estimates and Errors
In the absence of an IFRS, or any guidance that specifically applies to the reporting of a transaction, item or activity, IAS 8 requires the entity’s management to use its judgement in selecting accounting policies that
are:
relevant to the economic decision-making needs of the users and reliable
Define consistency in relation to accounting policies and any exceptions
An entity should select and apply its accounting policies consistently to promote comparability between financial statements of different accounting periods and for similar transactions, other events and conditions.
The only exception is where IFRS specifically requires or permits item categorisation and the application of different policies. An appropriate accounting policy should be selected and applied consistently to each category.
When and how should entities change their accounting policies?
only if the change is required by IFRS or if it results in the financial statements providing reliable and more relevant information.
- As a general rule, a change in an accounting
policy must be applied retrospectively in the
financial statements – in other words, it should
be applied to prior periods as though that policy
had always been in place. - This will require adjustment of:
- the opening balance(s) in the current year’s statement of changes in equity (usually retained earnings)
- adjustment of all comparative amounts presented in the financial statement
What are accounting estimates?
The use of reasonable estimates is an essential part of the preparation of financial statements.
It does not undermine the reliability of financial statements.
Changes in accounting estimates result from new developments or information and should not be confused as corrections of errors.
True or False:
A change of depreciation method of a tangible
non-current asset is a change of accounting
estimate not a change in accounting policy.
True. The accounting policy is the asset
continues to be depreciated. What has changed is
the estimated consumption of benefits from the
asset
True of False
The effect of a change in an accounting estimate is recognised prospectively.
True:
The effect of a change in an accounting estimate is recognised prospectively by including it in the statement of profit or loss and OCI.
If the change affects that period only, the effect is recognised in the period of the change.
If the change affects both the period of the change and future periods, the effect is recognised in the current and future periods
What is a Prior Period Error
Omissions from and misstatements in the entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that:
was available when the financial statements for those periods were authorised for issue;
could have been reasonably expected to be taken into account in the preparation and presentation of those financial statements.
Name four examples of Prior Period Errors
A material over/understatement of revenue, inventory or other expenses due to mathematical mistakes
Mistakes in applying accounting policies
Oversights or misinterpretations of facts
Fraud
How would you reporting a change in an accounting estimate?
A material change in an accounting estimate requires the
prospective application. The change would also be disclosed in the notes to the financial statements.
Give and example of a change in accounting estimates?
a change in the estimated lifespan of a fixed asset or a change in the estimate used in the calculation of the provision of doubtful debtors
